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POSTED BY ON March 11, 2013 1:59 pm COMMENTS (8)
there is a big debate in usa on index versus active funds……..??? does this argument hold water in indian scenario……..subra sir dosent like the indexing method used in india…….??? guys throw some light on the issue!!!
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Yes the construction of index in india is poor and hence its easy to beat the index. You can easily beat Sensex with just 5 stocks from it like HDFC,HDFCBank,ITC,L&T and BajajAuto. This could be easily true for future too.
But given the way the active funds have been beating with great margin we have a long way to go before we can invest in index funds in india,,this subra himself has said many a times.
The closest Index fund with less expense is IDFC and there is NiftyBees. But i would say we have few more decade to go before narrowing the gap between active(well managed) and index funds
Dear Nikhil, whatever available composition of Index is there, we w’d have to accept it. If it’s faulty at all, we are measuring the outperformance of our active funds against this very faulty Index. So in that sense, it dose not matter.
By the way – In place of sensex or nifty, CNX 500 is a better index in terms of over all stocks composition.
Thanks
Ashal
dear experts thanks a lot for the wonderful response to my query……i think my question was incorrect in the sense that by indexing method i wanted to ask about “the construction of the index in india” …..if you have read the articles like “index fund problem dated 05/2009” and more articles about index fund investment on subramoney……you will get the view that indexing is still not a good idea in indian conditions………your views are invaluable please reply
thanks
nikhil
Hey Nikhil –
Some of the best minds on this forum have already answered. Just my 0.02 on this issue:
I have agonized over Active MFs vs. indexing for a long time. This internal debate has been triggered by reading many excellent (yet US centric) books. There is a very strong school of thought in the US (for example the Bogleheads forum) which believes that indexing beats active management over long periods of time. And this has proven true in the US. You can literally count using your fingers, fund managers who have beaten the S&P500 by 3-4% over long periods of time.
Yet in the Indian context, I think investing via the Active MF route makes sense for the following reasons:
Active MF returns in India regularly beat ETFs – I know looking at past performance is not the best way to choose mutual funds. But you cannot ignore the fact that good funds such as HDFC top 200 or DSP top 100 routinely seem to outperform the indices by 5-8%. And they have been doing this for many years . So the incremental cost of 1.7% seems worthwhile to have Sankaran Naren or Prashant Jain manage my money!
Index funds are not quite there in India – This applies to most Indian index funds. They charge a high % as AMC, have a high tracking error and are not truly passive.
ETF costs not as low as the US or UK – ETFs are much better than Index funds in India. But the AMC costs leave much to be desired compared to the US market. For example, Goldman Sachs Nifty Bees charges around 0.5% as against Vanguard which charges 0.09% on its S&P500 index fund.
Having to pay brokerage charges – This can be around 1.5% of the investment value for buying and selling. If an investor rebalances even once a year, a lot of the cost advantage vis-a-vis AMC costs is lost.
Hope this helps – This is just a personal perspective and I am happy to stand corrected if any others have a different view 🙂
Ganesh
Fully agree with you.
Nikhil,
Why don’t you put a summary of the supposedly ‘big debate’ about indexing versus active management here? About how it is being done in USA. And about how it gets translated into Indian terms.
Then what are Subra’a views (mind you, his views are flexible and dynamic, as should be).
That would be a good way to start any other views!
Dear Nikhil, how do you come to the conclusion that dear Subra does not like Index funds in India? Please read so many posts of him where he is advocating Index funds whenever he is asking for KISS.
Please read my reply in addition to what dear FFC had already told you.
Thanks
Ashal
The debate hinges on lower expense ratios for index funds. In India index funds charges much higher expense ratio than USA counterparts.
Quantum Long term equity and direct plans of HDFC equity and top 200 have pretty low expense ratios comparable to Indian index funds.
Subra never said don’t invest in a index fund. A fund like Nifty Bees is a good one. He has always advocated funds with low expense ratios and is very much in favor of index funds ( In fact he is the one who asked me to make a expense ratio comparator bet. MFs).
Don’t overthink about this issue. Just choose a good fund and invest.